1) One of the criticisms of Basel 2 is that it is procyclical. That means that
A) banks may be required to hold more capital during times when capital is short
B) banks may become professional at a cyclical response to economic conditions
C) banks may be required to hold less capital during times when capital is short
D) banks will not be required to hold capital during an expansion
2) In a bank panic, the source of contagion is the
A) free-rider problem
B) too-big-to-fail problem
C) transactions cost problem
D) asymmetric information problem
3) In the simple deposit expansion model, if the required reserve ratio is 10 percent and
the Fed increases reserves by $100, checkable deposits can potentially expand by
A) $100
B) $250
C) $500
D) $1,000
4) Although debt contracts require less monitoring than equity contracts, debt contracts
are still subject to ________ since borrowers have an incentive to take on more risk
than the lender would like.
A) moral hazard
B) agency theory
C) diversification
D) the “lemons” problem
5) Secondary reserves are so called because
A) they can be converted into cash with low transactions costs
B) they are not easily converted into cash, and are, therefore, of secondary importance
to banking firms
C) 50% of these assets count toward meeting required reserves
D) they rank second to bank vault cash in importance of bank holdings
6) If you bought a long futures contract you hope that bond prices
A) rise
B) fall
C) are stable
D) fluctuate
7) The Fed operating procedures employed between 1979 and 1982 resulted in
________ swings in the federal funds rate and ________ swings in the M1 growth rate.
A) increased; increased
B) increased; decreased
C) decreased; decreased
D) decreased; increased
8) Which of the following statements concerning bank regulation in the United States is
true?
A) The Office of the Comptroller of the Currency has the primary responsibility for
state banks that are members of the Federal Reserve System
B) The Federal Reserve and the state banking authorities jointly have responsibility for
the 900 state banks that are members of the Federal Reserve System
C) The Office of the Comptroller of the Currency has sole regulatory responsibility
over bank holding companies
D) The state banking authorities have sole regulatory responsibility for all state banks
9) The Argentine banking crisis of 2001 resulted from Argentina’s banks being required
to
A) purchase large amounts of government debt
B) pay back the value of failed loans
C) make risky real estate loans
D) make loans to only state-owned businesses
10) If people expect nominal interest rates to be lower in the future, the expected return
to bonds ________, and the demand for money ________.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
11) Member commercial banks have purchased stock in their district Fed banks; the
dividend paid by that stock is limited by law to ________ percent annually.
A) four
B) five
C) six
D) eight
12) In the Governing Council, the decision of what policy to implement is made by
A) majority vote of the Executive Board members
B) majority vote of the heads of the National Banks
C) consensus
D) majority vote of all members of the Governing Council
13) ________ is the field of study that applies concepts from social sciences such as
psychology and sociology to help understand the behavior of securities prices.
A) Behavioral finance
B) Strategical finance
C) Methodical finance
D) Procedural finance
14) Depositors have a strong incentive to show up first to withdraw their funds during a
bank crisis because banks operate on a
A) last-in, first-out constraint
B) sequential service constraint
C) double-coincidence of wants constraint
D) everyone-shares-equally constraint
15) A ________ makes investments in new start-up businesses.
A) capital buyout fund
B) sovereign wealth fund
C) venture capital fund
D) hedge fund
16) The federal agencies that examine banks include
A) the Federal Reserve System
B) the Internal Revenue Service
C) the SEC
D) the U.S. Treasury
17) Of the following, which would be the first choice for a bank facing a reserve
deficiency?
A) Call in loans
B) Borrow from the Fed
C) Sell securities
D) Borrow from other banks
18) A ________ makes investment in established businesses which are publically traded
and takes them private.
A) sovereign wealth fund
B) capital buyout fund
C) hedge fund
D) venture capital fund
19) Conventional money demand functions tended to ________ money demand in the
middle and late 1970s, and ________ velocity beginning in 1982 .
A) overpredict; overpredict
B) overpredict; underpredict
C) underpredict; overpredict
D) underpredict; underpredict
20) A sharp increase in the growth of the money supply is likely followed by
A) a recession
B) a depression
C) an increase in the inflation rate
D) no change in the economy
21) If $22,050 is the amount payable in two years for a $20,000 simple loan made
today, the interest rate is
A) 5 percent
B) 10 percent
C) 22 percent
D) 25 percent
22) Which of the following is not a reason financial regulation and supervision is
difficult in real life?
A) Financial institutions have strong incentives to avoid existing regulations
B) Unintended consequences may happen if details in the regulations are not precise
C) Regulated firms lobby politicians to lean on regulators to ease the rules
D) Financial institutions are not required to follow the rules
23) When the financial institution is hedging interest-rate risk on its overall portfolio,
then the hedge is a
A) macro hedge
B) micro hedge
C) cross hedge
D) futures hedge
24) Microprudential supervision does all of the following except
A) checking capital ratios of a bank
B) checking a bank’s compliance with disclosure requirements
C) assessing the riskiness of an individual bank’s activities
D) focusing on financial system liquidity
25) Which of the following can be described as involving direct finance?
A) A corporation issues new shares of stock
B) People buy shares in a mutual fund
C) A pension fund manager buys a short-term corporate security in the secondary
market
D) An insurance company buys shares of common stock in the over-the-counter
markets
26) Countries with surpluses in their balance of payments frequently do not want to see
their currencies ________ because it makes their goods ________ expensive abroad.
A) appreciate; less
B) appreciate; more
C) depreciate; less
D) depreciate; more
27) Suppose the economy is producing at the natural rate of output. An open market
sale of bonds by the Fed will cause ________ in real GDP in the long run and
________ in inflation in the long run, everything else held constant.
A) an increase; an increase
B) a decrease; a decrease
C) no change; an increase
D) no change; a decrease